Is the Income tax system truly fair?
It depends on your knowledge of the system and your perspective.
I recently read an article in the Wall Street Journal, stating 38.3% of taxpayers paid 61% of all Federal Income Tax in 2022.
Breaking it down, the top 1%, which represented 1.5 million returns, had an Adjusted Gross Income (AGI) of $663,000 and above, paid 40.4% of total Federal Income taxes in 2022. They earned a total of 22.4% of all reported earnings.
Between the top 1% and 5%, which represented approximately 6.2 million tax returns, with AGI above $262,000 and below $663K, paid 20.6% of all Federal Income Tax. They earned a total of 15.9% of all reported earnings.
The top 5% earned 38.3% of all reported earnings and paid 61% of Federal Taxes.
Many small business owners fall into this category. Small businesses employ a large portion of our working population. In addition to their personal income tax, they pay matching FICA (Social Security & Medicare) taxes, matching their employees. I mention this because many prior administrations wanted to increase taxes for anyone earning 400K or more claiming these taxpayers are not paying their fair share. My question, what is everyone’s fair share?
On the opposite side of the income spectrum, the bottom 50%, approximately
76 million tax returns paid 3% of the Federal tax and earned 11.5% of total earnings.
I am not suggesting taxpayers in the 1% should pay less or the bottom 50% should pay more. Just stating facts. An additional fact, the top tax rate prior to the Reagan years hovered over 50% for many years.
What about the so-called millionaires and billionaires?
First, being worth over a million dollars is becoming common. Most likely, if you’re reading this blog, you have a net-worth over 1 million dollars. Do you think you’re paying your fair share?
Many billionaires pay a significant amount of taxes, however the percentage rate is low, as a large portion of their income is dividends, capital gains and aggressive tax planning. Some of the planning makes sense, however there is a huge difference between tax reduction and tax avoidance.
What is fair? The United States government has been trying to figure this out for years. Income Tax rates have changed countless times over the years, and it’s expected the same will continue going forward.
Makes annual and longer-term tax planning an integral part of your financial planning!
Final Month of the Year
2024 will soon be in the rear-view mirror. I’ll soon be reading market and economic predictions for 2025 by most of the larger investment firms. As always, opinions will be widespread and filled with bias. Taxes and Tariffs will be the new common theme in most predictions.
This time last year, only a handful of market prognosticators predicted the S&P would return over 20% in 2024. At least they make good reading!
What will be the impact of tariffs for 2025? The economists are having a field day. Tariffs are not new. Some are predicting widespread inflation, loss of jobs and worse. Some suggest tariffs will reduce economic growth while others suggest tariffs will add to our growth.
One thing for sure, changes are forthcoming. How will everything work out? As always, time will tell!!
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
